Lessons of the Third Wave: The Urban Outfitters Story

If growth is easier to achieve online, why bother with new stores?

July 29, 2015

By Lee Peterson

When the CFO of Urban Outfitters, Frank Conforti, talked to Wall Street analysts late last year, he took pains to point out the kind of fact retail executives often try to obscure: The direct-to-consumer channel was outperforming the company’s stores. Sales via web, mobile and mobile apps were going up, with positive gains at all brands—which includes Anthropologie, BHLDN (the company’s wedding brand), Free People, Terrain and Urban Outfitters. But on the store side, comp-store sales were in the negative range.

As a bellwether, these divergent growth trajectories are illustrative of a harsh truth: It’s increasingly difficult for retail brands to build a road map to consistent, reliable growth. You can’t just open up new stores and expect equivalent increases in sales. Of course, it wasn’t always this way. Urban Outfitters once had no problem posting reliable gains in comp-store sales. Now the reliable growth is more consistently on the non-store side of the business. They aren’t building new stores at the same clip anymore, but channeling capital investments into fulfillment centers, including a new one-million square foot, highly automated facility in Gap, Pennsylvania. Fulfillment centers are what’s keeping all those fleece hoodies and hipster fashion sneakers landing on-time and on the right porch.

But if direct-to-consumer sales are outperforming stores, why don’t they just stop investing in stores? Urban Outfitters will still open approximately 32 new stores this year—four new Urban Outfitters, 13 new Anthropologies Group stores globally, and 15 new Free People stores in North America, according to a March earnings call between company executives and Wall Street analysts.

Despite doomsayers prophesizing the end of the store, the physical side of commerce can’t be ignored. While struggling to resurrect comp-store sales from once enviable heights, Urban Outfitters has still managed to grow its direct-to-consumer business. Something the company never would have been able to achieve if it didn’t maintain cultural relevance in the marketplace with physical stores.

That’s what makes the company’s Third Wave model worth emulating. In fact, they are an ideal case for studying how store brands can keep physical stores alive and relevant, while still navigating solid investments in online growth.

1. Investing in stores isn’t a zero-sum game

Disinvestment in stores to drive direct-to-consumer growth, or vice versa, isn’t a viable strategy. In our study of third-wave retail brands we discovered that brands emphasizing in-store innovation, also experienced growth in direct-to-consumer channels. Put another way: (There’s no magic either/or formula for navigating the complex and increasingly fickle demands of consumers.) Case in point: The swift actions Urban Outfitters launched to rejuvenate the in-store experience, as Tedford Marlow, CEO of the Urban Outfitters Group, explained in a recent call with analysts. Marlow outlined a series of innovative initiatives, which we should note, are almost all capital investments in physical stores.

They included:

Space Ninety 8 in Williamsburg Brooklyn, which has a community minded emphasis and its own local marketplace

And the launch of Without Walls, the company’s own active lifestyle brand with experiential marketing and unique performance products that have developed a community of athletic advocates and given the company a new entry into this fast-growing apparel segment

The lesson: There’s no time for store brands to stand still—and in-store innovations can often lead to direct-to-consumer growth.

2. Loyal direct-to-consumer customers are found with meaningful in-store experiences

Let’s take a step back and consider the definition of physical. According to the New Oxford American Dictionary, it means “of or relating to things perceived through the senses as opposed to the mind; tangible or concrete.” Urban Outfitters became the brand known for street style by appealing first to the senses, including its wide-open doors that literally lead right out into the streets. Without millions of consumers embarking on Saturday morning walks downtown after leisurely brunches, and without the tactile, experience of wandering up and down open staircases inside these emporiums of ephemeral trends, they would never have been able to launch a successful direct-to-consumer business. After all, you can’t peddle hipsterdom to the masses if you aren’t in key urban centers.

The Lesson: Unless a store brand has built a concrete and tangible in-store experience, it will be difficult to drive direct-to-consumer sales.

3. A single store brand banner is too limiting

Since its founding in 1970, Urban Outfitters has constantly expanded and developed new brands. Today it operates five separate brands and over 400 retail locations worldwide. These include its namesake stores and Anthropologie, but there are various new concept stores, including Free People, a specialty women’s clothing boutique with a bohemian theme. Terrain, which although in operation at only two locations, represents a fundamentally new retail concept. Each location also offers an in-store restaurant with a local, organic/farm-to-plate theme, or as the company describes the Westport Garden Café, it aesthetically and gastronomically reflects the cycle of the seasons and the local Westport community. Then there’s the bridal store BHLDN. The company also recently added Space Ninety 8—a concept store, which The New York Times recently called “a preservationist gesture, a middle-class beachhead against creeping luxury at every turn.”

The Lesson: Don’t be monolithic. The marketplace is in constant flux, so standing still is not an option. Retailers must constantly adapt with new assortments to appeal to emerging demographics and generational change.